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Sutherland Asset Mgmt boosts leverage in its latest CRE CLO

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Sutherland Asset Management is tapping the securitization market to finance another $278.3 million of bridge loans on apartment buildings, offices and industrial parks.

RCMF 2018-FL2 is more highly leveraged than Sutherland’s previous commercial real estate collateralized loan obligation (CRE CLO), which was completed in 2017, according to Kroll Bond Rating Agency. It also has heavy exposure to properties that are either vacant or have low occupancy levels.

In most other respects, however, the deal is very similar to RCMG 2017-FL1. It is a static transaction backed by 54 commercial mortgage loans (or loan participations) secured by 56 properties, all of them originated in 2017 and 2018 by ReadyCap Commercial, an indirect subsidiary of the sponsor. ReadyCap has a limited ability to reinvest principal proceeds on assets held in the trust to acquire companion interests in the properties that rank on an equal, or pari passu, basis.

In its presale report, Kroll noted that the portfolio is more granular than the 13 CRE CLOs it has rated over the past year, both in terms of loan count and loan size. The top five loans account for 5.8% of the portfolio, compared with an average 9.2% for the comparable set. This offers “more protection to noteholders from defaults and losses arising from one or a few loans relative to more concentrated pools,” the report states.

Still, the collateral is highly leveraged, with a weighted average loan-to-value ratio, as measured by Kroll, of 121.2% based on assets held in the trust alone. That’s “meaningfully above” the 112.1% KLVT for Sutherland’s previous CRE CLO, albeit slightly below the average of 122.6% for the 13 CRE CLO transactions rated by Kroll during the past year.

Sutherland’s latest transaction also includes a high percentage of properties that have low occupancy levels or are vacant. Twenty-three (46.7%) have occupancy rates of less than 60%. Furthermore, 16 of these properties (35.2%) are less than 40% occupied. Of this amount, 10 properties (21.7%) are vacant, which is “meaningfully higher” than other Kroll-rated CRE CLOs.

Kroll expects to assign an AAA to the $154.5 million senior tranche of notes to be issued, which accounts for 44.5% of the notes to be issued, up from 42% for the senior tranche of the July 2017 deal.

J.P. Morgan is the lead placement agent.

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